Question

Juan can produce:
• 30 cups if he produces cups all day
• 10 plates if he produces plates all day
Maria can produce:
• 10 cups if she produces cups all day
• 30 plates if he produces plates all day
Questions
1. Draw the production possibility frontiers of Maria and Juan (plates on the
horizontal axis and cups on the vertical)
2. Calculate the opportunity cost for cups and plates for Maria and Juan
3. Calculate the Comparative advantage for cups and plates for Maria and Juan
4. Who should specialize on what?
5. Find a trade agreement that both would accept and show that both would be better
off
6. Find a trade agreement that one of them would not accept
7. What is the condition for any of the partners under which would accept a trade
agreement

Answer 1

Answer (1):

From the above diagram we can see that Plates is measured along the horizontal X axis and Cups is measured along the Vertical Y axis. The curves depict the Production possibility of the Juan and Maria.

Answer (2): For Maria, the opportunity cost for cups is equal to sacrificing 30 plates.

                                      & the opportunity cost for Plates is equal to sacrificing 10 cups.

                    For June, the opportunity cost for cups is equal to sacrificing 10 plates.

                                      & the opportunity cost for Plates is equal to sacrificing 30 cups.

Answer (3): For Maria, the comparative advantage for cups is equal to (10-30) = -20 plates.

                                      & the comparative advantage for Plates is equal to (30-10) = 20 cups.

                    For June, the comparative advantage for cups is equal to (30-10) = 20 plates.

                                      & the comparative advantage for Plates is equal to (10-30) = -20 cups.

Answer (4): Since June can produce more cups per day and Maria can produce 30 plates per day, therefore, June should specialize in the production of cups and Plates should specialize in the production of Plates.

Answer (5): If the trade agreement is that June will import 10 plates from Maria and Maria will import 10 cups from June, then both Maria and June will have a total of 20 cups and 20 plates, this making them both better off.

Answer (6): If the trade agreement says one of the traders would import 20 units of product, this will not be acceptable to the other party in the trade, as the other party would be left with lesser number of the products for its market.

Answer (7): The condition that must prevail for any of the partners under which they would both accept the trade agreement is that they must have equal number of both cups and plates so that their product can be sold as a pair in the market and optimal revenue can be earned.